Winning the War, losing the Battle and the Red Queen

'I daresay you haven't had much practice,' said the Queen. 'When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast. There goes the shawl again!'

After a re-read of the last post, I don’t think I was very clear about why the distinction between solvency and debasement is so important.

Using the words “inflation” over “going broke” moves the debate into much friendlier territory – because we have empirical and observable data to use. When people are talking about “going broke”, but there is no way to tell when we go broke, we are dealing with something that is unprovable and unknowable and ultimately impossible. Anyone can then make up their own facts or reasons and there is no way to tell who is right or wrong. So you can make up your own reasonings and insist people accept them. There is no way to disprove your points, because the very foundation of the logic rests on an impossibility.

And with practice, there can be an entire edifice of logic built upon an impossibility. That’s what most of economics has done, either through direct assumptions, or through closeted ones like the Government budget constraints.

Putting the debate to debasement over solvency puts the debate into winnable territory. Leaving the debate to be over solvency in the popular culture is a sure way to lose the larger war. This is why the language change by Bill Gross is hugely important. This was pointed out as a huge change by some people doing the daily grind work over at Mosler’s place:

Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.

When Bill Gross – the most widely followed bond manager on the planet – can no longer claim ‘the governments will go broke’ lest he be considered an idiot, we are shifting the argument to a debate we can win.

My biggest hope is that I have to change from warning about deflation to warning about high levels of inflation in 5 years. I don’t think that we’re even close to hyperinflation. But if people start to accept that the government cannot go broke, the likely outcome is that someone will just propose spending as much as possible.